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Tuesday, February 24, 2009

Fed Chairman Bernanke Said Recession Should End This Year

In his prepared remarks today, Federal Reserve chairman Ben Bernanke said the recession should end this year. Bernanke said this will require restoring financial stability. Bernanke said this during his "Semiannual Monetary Policy Report to the Congress" given before the "Committee on Banking, Housing and Urban Affairs" in the U.S. Senate in Washington, D.C. It was broadcast mostly live on CNBC. Bernanke said:

"The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half."

Bernanke said we need fiscal stimulus:

"To break the adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets."

Bernanke said the recession could end in 2009 with 2010 a recovery year:

"If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability--and only if that is the case, in my view--there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery."

but he expects a FULL RECOVERY to take more than two years:

"The central tendency for the participants' estimates of the longer-run growth rate of real GDP is 2-1/2 percent to 2-3/4 percent; the central tendency for the longer-run rate of unemployment is 4-3/4 percent to 5 percent; and the central tendency for the longer-run rate of inflation is 1-3/4 percent to 2 percent, with the majority of participants looking for 2 percent inflation in the long run. These values are all notably different from the central tendencies of the projections for 2010 and 2011, reflecting the view of policymakers that a full recovery of the economy from the current recession is likely to take more than two or three years."

During the Q&A, my favorite line was Bernanke explaining why we should help others having trouble paying their mortgages, a policy that "rewards bad behavior."

"I fully understand the sentiment. A lot of this goes against American values of self reliance and responsibility... I would give the following example. If your neighbor smokes in bed and sets his house a fire. And you live in a neighborhood of closely packed wooden houses. You could punish him very severely by refusing to send the fire department and then he would probably learn his lesson about smoking in bed. But, unfortunately, in the process you would have the entire neighborhood burning down. "

The question was partially in response to Rick Santelli's "Chicago Tea Party in July" Rant video that led to a flood of letters to congress protesting efforts to reduce what people owe who signed legal contracts with banks, often after lying about their income to qualify for the mortgage.